an amicus brief opposing the petition of the united...
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UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUITThurgood Marshall U.S. Courthouse 40 Foley Square, New York, NY 10007 Telephone: 212-857-8500
MOTION INFORMATION STATEMENT
Docket Number(s): Caption [use short title]
Motion for:
Set forth below precise, complete statement of relief sought:
MOVING PARTY: OPPOSING PARTY: 9 Plaintiff 9 Defendant
9 Appellant/Petitioner 9 Appellee/Respondent
MOVING ATTORNEY: OPPOSING ATTORNEY:
[name of attorney, with firm, address, phone number and e-mail]
Court-Judge/Agency appealed from:
Please check appropriate boxes: FOR EMERGENCY MOTIONS, MOTIONS FOR STAYS AND
INJUNCTIONS PENDING APPEAL:
Has movant notified opposing counsel (required by Local Rule 27.1): Has request for relief been made below? 9 Yes 9 No
9 Yes 9 No (explain): Has this relief been previously sought in this Court? 9 Yes 9 No
Requested return date and explanation of emergency:
Opposing counsel’s position on motion:
9 Unopposed 9 Opposed 9 Don’t Know
Does opposing counsel intend to file a response:
9 Yes 9 No 9 Don’t Know
Is oral argument on motion requested? 9 Yes 9 No (requests for oral argument will not necessarily be granted)
Has argument date of appeal been set? 9 Yes 9 No If yes, enter date:__________________________________________________________
Signature of Moving Attorney:___________________________________Date: ___________________ Service by: 9 CM/ECF 9 Other [Attach proof of service]
Form T-1080 (rev. 12-13)
13-1837 (L), 13-1917 (CON)
Leave to appear as amicus and to file
an amicus brief opposing the petition of the United
States for rehearing or rehearing en banc.
Mark Cuban seeks leave to appear as amicus
United States of America v. Newman
curiae and to file an amicus brief in opposition
to the petition filed by the United States seeking
panel rehearing or rehearing en banc.
Mark Cuban, amicus curiae United States of America
Ralph C. Ferrara Michael A. Levy
Proskauer Rose LLP
1001 Pennsylvania Ave., N.W., Suite 600 South, Washington, DC 20004
(202) 416-5820 [email protected]
U.S. Attorney's Office for the Southern District of N.Y.
1 St. Andrew's Plaza, New York, NY 10007
(212) 637-2346
Southern District of New York - The Hon. Richard J. Sullivan, No. 12-cr-121
✔
✔
✔
✔
✔
✔
Pursuant to Fed. R. App. P. 29 and this Court's
January 29, 2015 Order, amicus was not required to notify opposing counsel.
s/ Ralph C. Ferrara 2/19/15
Case 13-1917, Document 283, 02/19/2015, 1442231, Page1 of 27
UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT
UNITED STATES OF AMERICA, Appellee,
v.
TODD NEWMAN, ANTHONY CHIASSON, Defendants-Appellants,
JON HORVATH, DANNY KUO, HYUNG G. LIM, MICHAEL STEINBERG,
Defendants.
) ) ) ) ) ) ) ) ) ) ) )
Nos. 13-1837(L) 13-1917 (CON)
MEMORANDUM OF MARK CUBAN IN SUPPORT OF HIS MOTION FOR LEAVE TO FILE AN AMICUS CURIAE BRIEF OPPOSING THE PETITION OF THE UNITED STATES FOR
REHEARING OR REHEARING EN BANC
Pursuant to Fed. R. App. P. 29 and this Court’s January 29, 2015 Order,
Mark Cuban respectfully requests permission to file an amicus curiae brief in
opposition to the petition of the United States for rehearing or rehearing en banc.
I. MR. CUBAN HAS AN INTEREST RELEVANT TO THE COURT’S CONSIDERATION OF THE GOVERNMENT’S PETITION
The principal issue addressed in the Panel’s decision is whether the
Government should be allowed to continue to expand the scope of insider trading
prohibitions through litigation, thereby putting individuals at criminal (as well as
civil) risk for violating as-yet-undefined principles.
Case 13-1917, Document 283, 02/19/2015, 1442231, Page2 of 27
Amicus curiae Mark Cuban knows those perils all too well. Mr. Cuban is a
successful businessman, an investor, the owner of several business ventures,
including the NBA’s Dallas Mavericks, and one of the stars of the popular
television show “Shark Tank.” He was pursued by the Securities and Exchange
Commission for over six years on allegations that his sale of stock while in
possession of information transmitted during a conversation with the CEO of the
issuer was illegal insider trading even though Mr. Cuban had no preexisting duty
of trust or confidence with the issuer. A jury rejected the SEC’s claims after less
than four hours of deliberation. Based on that experience, Mr. Cuban knows better
than anyone the consequences of Government attempts to expand the scope of
insider trading to reach innocent victims.
Mr. Cuban chose to defend himself against the SEC’s baseless charges
rather than cave into its demands to settle (which would have cost him
approximately $2,000,000 in fines). That defense cost him multiples of what a
settlement would have, but it resulted in full vindication.
Mr. Cuban considers himself fortunate to have had the wherewithal to
defend himself against the SEC’s meritless claims. He recognizes, however, that
not everyone is able to take that route. Many innocent individuals are no doubt
forced to settle with the Government simply because they cannot afford to defend
themselves. For that reason, Mr. Cuban has a keen interest in expressing his views
2
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on this important issue and endorsing this Court’s rejection of the Government’s
“gotcha” tactics. As a persistent and successful advocate in his own defense, he is
well suited to inform the Court about the lives, livelihoods, and legacies that can be
jeopardized for years when an individual is the victim of novel legal precepts that
sprout from the brows of over-eager prosecutors, rather than from the deliberative
legislative process.
In its petition for rehearing or rehearing en banc, the Government seeks to
expand the meaning of a tipper’s “personal benefit” in an attempt to ensnare
innocent tippees whose trades were perfectly legal under established law. The
Panel resoundingly rejected that expansion. Mr. Cuban believes that the Panel got
it right and that the Government’s petition should be rebuffed.
II. MR. CUBAN’S BRIEF IS DESIRABLE BECAUSE IT PRESENTS UNIQUE ARGUMENTS THAT ARE RELEVANT TO THE DISPOSITION OF THIS APPEAL
Mr. Cuban can offer unique insights and arguments to the Court as it
considers the Government’s request for a rehearing or rehearing en banc.
First, Mr. Cuban can speak to the very real effects of the Government’s
conduct on individuals who become victims of its crusade to expand the reach of
insider trading through litigation.
Second, none of the briefs filed to date contains a discussion of Congress’
rejection of attempts to codify the definition of insider trading. The Court’s
3
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consideration of the Government’s petition will be enhanced by an understanding
of the legislative history on this issue.
CONCLUSION
The accompanying amicus curiae brief will aid this Court with respect to its
consideration of whether to grant the Government’s petition for rehearing or
rehearing en banc. Accordingly, movant Mr. Cuban respectfully requests leave to
file the accompanying amicus curiae brief.
Respectfully submitted,
/s/ Ralph C. Ferrara Ralph C. Ferrara Ann M. Ashton Rachel O. Wolkinson Scott J. Fishwick Proskauer Rose LLP 1001 Pennsylvania Avenue, NW Suite 600 South Washington, DC 20004 (202) 416-6800 John E. Roberts Proskauer Rose LLP One International Place Boston, Massachusetts 02110 (617) 526-9600
4
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Stephen A. Best Brown Rudnick, LLP 601 Thirteenth Street, NW Suite 600 Washington, DC 20005 (202) 536-1700
February 19, 2015 Attorneys for Amicus Curiae Mark Cuban
5
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BRIEF
Case 13-1917, Document 283, 02/19/2015, 1442231, Page7 of 27
13-1837-cr(L), 13-1917-cr(CON)
United States Court of Appeals for the
Second Circuit
UNITED STATES OF AMERICA,
Appellee,
– v. –
TODD NEWMAN, ANTHONY CHIASSON,
Defendants-Appellants,
JON HORVATH, DANNY KUO, HYUNG G. LIM, MICHAEL STEINBERG,
Defendants.
–––––––––––––––––––––––––––––– ON APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF NEW YORK
BRIEF FOR AMICUS CURIAE MARK CUBAN IN OPPOSITION TO PETITION FOR REHEARING AND REHEARING EN BANC
JOHN E. ROBERTS PROSKAUER ROSE LLP One International Place Boston, Massachusetts 02110 (617) 526-9600
STEPHEN A. BEST BROWN RUDNICK LLP 601 Thirteenth Street, NW, Suite 600 Washington, DC 20005 (202) 536-1700
RALPH C. FERRARA ANN M. ASHTON RACHEL O. WOLKINSON SCOTT J. FISHWICK PROSKAUER ROSE LLP 1001 Pennsylvania Avenue, NW,
Suite 600 South Washington, DC 20004 (202) 416-6800
Attorneys for Amicus Curiae Mark Cuban
Case 13-1917, Document 283, 02/19/2015, 1442231, Page8 of 27
TABLE OF CONTENTS
Page
Table of Authorities .................................................................................................. ii Interest of Amicus Curiae .......................................................................................... 1
Preliminary Statement ................................................................................................ 1 Argument……………………………………………………………………………4
I. People Who Trade Lawfully Should Not Have to Fear Becoming a Defendant in a Government Proceeding .................................................... 4
II. Other Than in the Limited Context of Section 16(b), Congress Provided No Proscription Against Insider Trading in the Securities Exchange Act of 1934 ................................................................................ 5
III. Despite Having Many Opportunities, Congress Has Failed to Codify or Otherwise Define Insider Trading ............................................. 9
IV. The Government’s Proposed Diminution of What Is Needed to Demonstrate Personal Benefit Was Correctly Rejected by the Panel ......12
Conclusion ...............................................................................................................15
Case 13-1917, Document 283, 02/19/2015, 1442231, Page9 of 27
TABLE OF AUTHORITIES
Cases Page(s)
Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299 (1985) ...................... 8
Blau v. Lehman, 368 U.S. 403 (1962) ....................................................................... 6
Bob Jones Univ. v. United States, 461 U.S. 574 (1983) .......................................... 11
Chiarella v. United States, 445 U.S. 222 (1980) ..............................................passim
Dirks v. SEC, 463 U.S. 646 (1983) ...................................................................passim
Gustafson v. Alloyd Co., 513 U.S. 561 (1995) ........................................................ 13
In the Matter of Cady, Roberts & Co., 40 S.E.C. 907 (1961) ................................... 6
Norwood v. Kirkpatrick, 349 U.S. 29 (1955)............................................................. 9
SEC v. Tex. Gulf Sulfur Co., 401 F.2d 833 (2d Cir. 1968) ........................................ 7
United States v. Jiau, 734 F.3d 147 (2d Cir. 2013) ................................................. 14
United States v. Newman, 773 F.3d 438 (2d. Cir. 2014) ..................................passim
Statutes and Administrative Codes
15 U.S.C. § 74p(b) ..................................................................................................... 5
15 U.S.C. § 78j(b) ...................................................................................................... 1
15 U.S.C. § 78u ........................................................................................................ 10
17 C.F.R. § 240.10b-5 ............................................................................................ 6, 8
Fed. R. App. P 29(c)(5). ............................................................................................. 1
Other Authorities
2 ALI Federal Securities Code (1978) ....................................................................... 9
ii
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Donald Cook & Myer Feldman, Insider Trading under the Securities Exchange Act, 66 Harv. L. Rev. 385 (Jan. 1953) ................................................ 5
Fred D’Amato, Comment: Equitable Claims to Disgorged Insider Trading Profits, 1989 Wis. L. Rev. 1433 (1989) ............................................... 11
Harvey L. Pitt & Karen L. Shapiro, The Insider Trading Proscriptions Act of 1987: A Legislative Initiative for a Sorely Needed Clarification of the Law Against Insider Trading, 39 Ala. L. Rev. 415 (1988) ............................................................................................................. 2
Harvey L. Pitt et al., Problems of Enforcement in the Multinational Securities Market, 9 U. Pa. J. Int’l L. 375 (1987) ............................................. 10
H.R. Rep. No. 100-910 (1988). .......................................................................... 10, 11
Insider Trading and Securities Fraud Enforcement Act of 1988, Pub. L. No. 100-704, 102 Stat. 4677 (1988) ............................................................... 11
Jonathan R. Macey, Cato Policy Analysis No. 101, SEC’s Insider Trading Proposal: Good Politics, Bad Policy (1988) ........................................ 10
Lisa Shidler, Persecuted Mark Cuban Prosecuted the SEC and Wins Some Mea Culpas from Christopher Cox, RIABiz, Dec. 10, 2014. ................ 4, 5
Miriam R. Albert, Company Registration in its Historical Context: Evolution Not Revolution, 9 U. Miami Bus. L. Rev. 67 (2001). .................... 9, 10
Oliver P. Colvin, A Dynamic Definition of an Prohibition Against Insider Trading, 31 Santa Clara L. Rev. 3 (1991) ............................................ 10
Statement Concerning Codification of the Federal Securities Laws, Securities Act Release No. 33,6242 (Sept. 22, 1980) .......................................... 9
Stephen Bainbridge, Securities Law: Insider Trading (2d ed. 2007) ....................... 2
iii
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INTEREST OF AMICUS CURIAE1
Mark Cuban is a successful businessman, an investor, the owner of several
business ventures, including the NBA’s Dallas Mavericks, and one of the stars of
the popular television show “Shark Tank.” He was pursued by the Securities and
Exchange Commission for over six years based on a novel theory of insider
trading. A jury ultimately exonerated Mr. Cuban on all charges. Based on that
experience, Mr. Cuban has an interest in opposing the Government’s attempt in
this appeal to expand the reach of the insider trading rules to cover activities that
are legal under established law.
PRELIMINARY STATEMENT
No one should be prosecuted for conduct that Congress is either unwilling or
unable to define. However, that is precisely what is occurring with respect to the
Department of Justice’s and the Securities and Exchange Commission’s pursuit of
insider trading claims under Section 10(b) of the Securities Exchange Act of 1934,
15 U.S.C. § 78j(b).2
1. This brief is submitted pursuant to this Court’s January 29, 2015 Order. No counsel for any party authored this brief in whole or in part, and no person or entity other than amicus and his counsel made a monetary contribution to its preparation or submission. See Fed. R. App. P 29(c)(5).
2. There is no codification of what constitutes insider trading under section 10(b) – the words “insider trading” are not even included in the statutory provision. Only one passage in the “voluminous legislative history” of the Exchange Act suggests that insider trading was intended to be covered by
Case 13-1917, Document 283, 02/19/2015, 1442231, Page12 of 27
Although Congress has been repeatedly challenged and even beseeched to
provide a definition of insider trading as it relates to section 10(b), it has declined
to do so. Instead of a statutory definition with boundaries, there is a patchwork of
judicial decisions cobbling together, on a case-by-case basis, what conduct gives
rise to liability.3 This has resulted in an “intolerable degree of uncertainty.”
Harvey L. Pitt & Karen L. Shapiro, The Insider Trading Proscriptions Act of 1987:
A Legislative Initiative for a Sorely Needed Clarification of the Law Against
Insider Trading, 39 Ala. L. Rev. 415, 416 (1988).
All of this is made even more difficult by the ambitious stance of the
Department of Justice (egged on by the SEC in its own cases) to take every
opportunity to seek an expansion of the parameters of prohibited insider trading by
bringing claims based on novel theories for which there is no precedent.4 Without
definitive guidance as to what is a violation and what is not, well-meaning
section 10(b) – and that passage, read in context, “does not deal with insider trading as we understand the term today, but rather with manipulation of stock prices by pools of insiders and speculators through cross sales, wash sales and similar ‘cunning’ methods.” Stephen Bainbridge, Securities Law: Insider Trading 26-27 (2d ed. 2007) (citation omitted).
3. As Judge Parker observed during oral argument, the law “seems to be varying according to which judge you’re talking to.” Transcript of Oral Argument at 29.
4. That is precisely the case in this appeal, as the Panel recognized. United States v. Newman, 773 F.3d 438, 448 (2d. Cir. 2014) (“[t]he Government’s overreliance on our prior dicta merely highlights the doctrinal novelty of its recent insider trading prosecutions”).
2
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innocent individuals are left in the untenable position of having to worry that what
is (and should be) a lawful transaction today will suddenly be alleged by the
Government to violate the federal securities laws tomorrow.
The Government, in its ever-broadening campaign against insider trading,
seems to have lost sight that its underlying goal should be to assure that the
markets are fair and equitable so that companies and investors are able to
participate with confidence, thus encouraging capital formation. Companies need
capital to grow, and investors need to know that the companies in which they
invest, and the markets in which they transact, will treat them fairly. Pursuing
individuals under novel theories does nothing to improve the fairness of the
markets.
Mr. Cuban knows all too well from personal experience that if the
Government labels an individual an “insider trader,” no matter how novel the
theory of liability, the individual is faced with a decision whether to succumb to a
settlement despite not believing that the conduct violated the law (and thereby
suffer the attendant financial, injunctive and reputational costs) or mount an
expensive and time-consuming defense that is likely to take years to resolve.
In an attempt to effect yet another expansion of insider trading proscriptions
– this time to cover remote (by several layers) tippees – the Government in this
case has misread and cherry-picked favorable dicta from prior cases to claim that
3
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mere friendship is sufficient to turn a perfectly legal transaction into criminal
insider trading. The Panel held that, for tippee liability to lie, the insider must
receive a personal benefit that is concrete, objective and “of some consequence.”
United States v. Newman, 773 F.3d 438, 452 (2d. Cir. 2014). The Panel got it
right. As discussed below, there is no reason to grant the Government’s petition.
ARGUMENT
I. PEOPLE WHO TRADE LAWFULLY SHOULD NOT HAVE TO FEAR BECOMING A DEFENDANT IN A GOVERNMENT PROCEEDING
While it might seem to go without saying that an individual who lawfully
trades his or her stock should not suddenly be captioned in a Government
enforcement proceeding, that is precisely what happened to Mr. Cuban. He spent
over six years and millions of dollars defending against novel insider trading
allegations by the SEC. While he was offered the opportunity to settle for much
less than his defense costs, he refused because he had done nothing wrong.
Although a jury fully vindicated Mr. Cuban, it was not without significant costs.
Not only was he forced to spend a considerable amount of time and money on his
defense, but he also lived under the bright light of the SEC’s allegations while the
case was pending. For example, he was jeered when attending Dallas Mavericks
games by chants of “insider trading.” See Lisa Shidler, Persecuted Mark Cuban
Prosecuted the SEC and Wins Some Mea Culpas from Christopher Cox, RIABiz,
4
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Dec. 10, 2014, http://www.riabiz.com/a/4938825004482560/ persecuted-mark-
cuban-prosecutes-the-sec-and-wins-some-mea-culpas-from-christopher-cox.
Notwithstanding those costs, Mr. Cuban at least could afford to defend himself.
Others may not be so fortunate.
Congressional codification of exactly what constitutes insider trading is
required. Absent that, the courts must continue to reject the Government’s
attempts to expand insider trading proscriptions through litigation pursuant to
which innocent traders find themselves ensnared in insider trading prosecutions.
II. OTHER THAN IN THE LIMITED CONTEXT SHORT-SWING TRADING, CONGRESS PROVIDED NO PROSCRIPTION AGAINST INSIDER TRADING IN THE EXCHANGE ACT
While Congress was aware of concerns regarding insider trading at the time
the Securities Exchange Act of 1934 was enacted, see, e.g., Donald Cook & Myer
Feldman, Insider Trading under the Securities Exchange Act, 66 Harv. L. Rev.
385, 386 (Jan. 1953), the Act addresses only a narrow subspecies of insider trading
– namely, where a director, beneficial owner, or officer personally achieves short-
swing profits by using nonpublic information to make both a purchase and a sale of
company stock within six months of each other. Securities Exchange Act of 1934,
ch. 404, tit. 1, § 16(b) (codified as amended at 15 U.S.C. § 74p(b)). And even in
that situation, only the company (or a shareholder acting derivatively on behalf of
5
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the company) may sue for disgorgement; there is no criminal liability, and the SEC
may not bring an action to enforce the prohibition.5 Id.
Despite the lack of Congressional proscription (or even intent) regarding
insider trading beyond the limited context of section 16(b), the SEC has not
hesitated to argue that section 10(b)’s fraud provision and Rule 10b-5 broadly
proscribe “insider trading.” Addressing the issue in In the Matter of Cady, Roberts
& Co., 40 S.E.C. 907 (1961), the SEC held that a trader committed a fraud – and
thus violated Rule 10b-5 – whenever he or she traded while knowing material
nonpublic information that the counterparty did not. In effect, the SEC demanded
a parity of information between traders: A trader either had to disclose his
informational asymmetry or abstain from trading. See Chiarella v. United States,
445 U.S. 222, 227 (1980).
This expansive view of insider trading had little basis in the Exchange Act –
indeed, it went well beyond Congress’s narrow proscription in section 16(b)
against short-swing trades by a limited group of insiders. The SEC nevertheless
5. Congress also specifically rejected the concept of tippee liability. A draft version of the Exchange Act would have barred certain corporate insiders from sharing confidential information with outsiders, and tippees who traded on illegally disclosed information would have had to disgorge to the issuer profits realized within six months of the disclosure (unless they could meet certain affirmative defenses). See Blau v. Lehman, 368 U.S. 403, 411-12 & n.12 (1962) (citing H.R. 7852, § 15(b); S. Rep. 2693, § 15(b)). But even this limited provision for tippee liability was eliminated from the Act prior to enactment. Id.
6
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managed to convince lower courts – including this one – to adopt its “disclose or
abstain” rule, and many successful (but baseless) insider trading actions were
brought accordingly. See, e.g., SEC v. Tex. Gulf Sulfur Co., 401 F.2d 833 (2d Cir.
1968).
The SEC pressed its flawed parity-of-information rule for nearly two
decades. It jettisoned the rule only when the Supreme Court reversed a decision of
this Court to hold that information parity is “inconsistent with the careful plan that
Congress has enacted for regulation of the securities markets.” Chiarella, 445 U.S.
at 235. The Chiarella Court explained that Congress did not outlaw all forms of
insider trading but only those that constitute fraud. Id. Trading on nonpublic
information is fraudulent only when the investor has an independent duty under the
common law to disclose that information or abstain from trading. Id. By contrast,
the SEC’s parity-of-information rule had created a “general duty between all
participants in market transactions to forego actions based on material, nonpublic
information” and thus “depart[ed] radically” from both the Exchange Act and
established fraud doctrine. Id. at 233.
Despite the setback in Chiarella, the SEC continued to press for expanded
insider trading proscriptions. Three years after Chiarella, the Supreme Court again
took up the issue in Dirks v. SEC, 463 U.S. 646 (1983). There, the SEC had
charged an analyst with insider trading after he had received and passed on to
7
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traders information from insiders concerning corruption at a financial firm. Id. at
648-49. The SEC’s position was that the analyst automatically inherited the
insiders’ common law duty not to trade on confidential information by virtue of
having received information from those insiders. Id. at 655-56. In other words,
the SEC believed that every tippee is subject to the parity-of-information rule. Id.
Once again, the Supreme Court rejected the SEC’s view of insider trading as
overly expansive. After repeating Chiarella’s holding that there can be no liability
for insider trading unless there is a fraud, id. at 666 n.27, the Court held that a
tippee does not per se acquire a duty to disclose or abstain whenever he acquires
insider information, id. at 659. To the contrary, a tippee “assumes a fiduciary duty
to the shareholders of a corporation not to trade on material nonpublic information
only when the insider has breached his fiduciary duty to the shareholders by
disclosing the information to the tippee and the tippee knows or should know that
there has been a breach.” Id. at 660 (emphasis added); see also Bateman Eichler,
Hill Richards, Inc. v. Berner, 472 U.S. 299, 313 (1985) (explaining that Chiarella
and Dirks make clear that “a tippee’s use of material nonpublic information does
not violate § 10(b) and Rule 10b-5 unless the tippee owes a corresponding duty to
disclose the information”).
History thus demonstrates that the SEC and DOJ will relentlessly push to
expand the outer limits of what constitutes insider trading until they are reined
8
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in. But expanding the reach of the insider trading laws is Congress’s
purview. See, e.g., Norwood v. Kirkpatrick, 349 U.S. 29, 40 (1955) (holding that a
court’s role is to “interpret [a statute,] not to expand and enlarge upon it”). And
time and again, Congress has declined to define insider trading.
III. DESPITE HAVING MANY OPPORTUNITIES, CONGRESS HAS FAILED TO CODIFY OR OTHERWISE DEFINE INSIDER TRADING
Beginning in 1969, a group of esteemed securities academics and
practitioners, led by Professor Louis Loss, participated in drafting the American
Law Institute’s Federal Securities Code (“ALI Code”). The ALI Code, completed
in 1978, was an attempt to re-codify the six federal securities statutes into a single
comprehensive code. See Miriam R. Albert, Company Registration in its
Historical Context: Evolution Not Revolution, 9 U. Miami Bus. L. Rev. 67, 78-79
(2001). Section 1603 of the ALI Code specifically prohibited insider trading. See
2 ALI Fed. Sec. Code § 1603 (1978). Section 1603(b) defined insiders to include
an expansive group of individuals (including both direct and indirect tippees) and
proposed to codify the “concept of an insider’s affirmative duty not to trade
without disclosure.” See id. cmts. 2(e), 3(e).
The SEC endorsed the ALI Code, Statement Concerning Codification of the
Federal Securities Laws, Securities Act Release No. 33,6242 (Sept. 22, 1980), and
in 1980 it was presented to Congress. Despite formal approval by the ALI,
9
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endorsement by the SEC, and support of the American Bar Association, the ALI
Code was never enacted into law by Congress. Albert, 9 U. Miami Bus. L. Rev.
at 80-81.
Congress next had an opportunity to address insider trading when it passed
the Insider Trading Sanctions Act of 1984, a law that permits the SEC to impose a
treble damages sanction on an individual who tips or trades while in possession of
material nonpublic information in violation of the Exchange Act. 15 U.S.C. § 78u.
But Congress specifically declined to define insider trading, apparently to avoid a
debate over the definition that could have stalled passage of the entire legislative
package. See Harvey L. Pitt et al., Problems of Enforcement in the Multinational
Securities Market, 9 U. Pa. J. Int’l L. 375, 382 n.11 (1987).
Yet another opportunity for Congressional action arose in June 1987, when
Senators Donald Riegle and Alfonse D’Amato took the issue head on in
introducing the Insider Trading Proscriptions Act of 1987. At the Senators’
request, the SEC submitted a proposed definition of insider trading drafted by the
Ad Hoc Legislative Committee on Insider Trading, chaired by Harvey Pitt. See
Jonathan R. Macey, Cato Policy Analysis No. 101, SEC’s Insider Trading
Proposal: Good Politics, Bad Policy, Mar. 31, 1988; Oliver P. Colvin, A Dynamic
Definition of a Prohibition Against Insider Trading, 31 Santa Clara L. Rev. 3,
10
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619-20 (1991). The bill was not enacted. See H.R. Rep. No. 100-910 (1988),
reprinted in 1988 U.S.C.C.A.N. at 6043.
Congress also considered adoption of an insider trading definition when it
enacted the Insider Trading and Securities Fraud Enforcement Act of 1988, Pub. L.
No. 100-704, 102 Stat. 4677 (1988). This Act added section 20A to the Exchange
Act to create an express private right of action for individuals who trade
contemporaneously with an insider trader. See Fred D’Amato, Comment:
Equitable Claims to Disgorged Insider Trading Profits, 1989 Wis. L. Rev. 1433,
1439 & n.29 (1989). In declining to adopt a definition for insider trading, the
House Report of the Committee on Energy and Commerce explained that
. . . the court-drawn parameters of insider trading have established clear guidelines for the vast majority of traditional insider trading cases . . . . Accordingly, the Committee does not intend to alter the substantive law with respect to insider trading with this legislation. The legal principles governing insider trading cases are well-established and widely-known.
H.R. Rep. No. 100-910, at *11 (1988), reprinted in 1988 U.S.C.C.A.N. at 6048.
At the time that statement was made, the “court-drawn parameters of insider
trading” were those set out by the Supreme Court in Chiarella and Dirks. Thus,
while Congress determined not to codify an insider trading definition, its citation to
“court-drawn parameters” indicates an endorsement of the limitations that the
Supreme Court had adopted in those cases. Cf. Bob Jones Univ. v. United States,
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461 U.S. 574, 601 (1983) (“[i]n view of its prolonged and acute awareness of so
important an issue, Congress’s failure to act on the [proposed] bills . . . provides
added support for concluding that Congress acquiesced in the IRS rulings”).
The Panel has followed the Supreme Court’s lead in rejecting the
Government’s attempts to expand insider trading law through litigation. If the
Government is unhappy with the court-drawn parameters, then its only choice is to
seek legislative help.
IV. THE GOVERNMENT’S PROPOSED DIMINUTION OF WHAT IS NEEDED TO DEMONSTRATE PERSONAL BENEFIT WAS CORRECTLY REJECTED BY THE PANEL
In Dirks, the Supreme Court considered the circumstances pursuant to which
a tippee would be liable for insider trading. Holding that a tippee “assumes a
fiduciary duty to the shareholders of a corporation not to trade on material
nonpublic information only when the insider has breached his fiduciary duty to the
shareholders by disclosing the information to the tippee and the tippee knows or
should know that there has been a breach,” 463 U.S. at 660 (emphasis added), the
Court then considered the species of “personal benefit” that could point to a
fiduciary breach:
This requires courts to focus on objective criteria, i.e., whether the insider receives a direct or indirect personal benefit from the disclosure, such as a pecuniary gain or a reputational benefit that will translate into future earnings . . . . There are objective facts and circumstances that often justify such an inference. For example, there
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may be a relationship between the insider and the recipient that suggests a quid pro quo from the latter, or an intention to benefit the particular recipient. The elements of fiduciary duty and exploitation of nonpublic information also exist when an insider makes a gift of confidential information to a trading relative or friend. The tip and trade resemble trading by the insider himself followed by a gift of the profits to the recipient.
Id. at 663-64.
In its petition for rehearing, the Government misconstrues this language in
Dirks to argue that a gift of material nonpublic information by an insider to a
relative or friend per se constitutes a personal benefit to the insider. Pet. for Reh’g
at 11. In making this argument, the Government first focuses on the language in
Dirks that a benefit may be found if there is a “relationship between the insider and
the recipient that suggests a quid pro quo from the latter, or an intention to benefit
the particular recipient.” See 463 U.S. at 663. The Government’s entire argument
is dependent on the word “or” meaning that either clause, standing alone, would
support an inference of a personal benefit to the insider. That is not the case.
Consistent with principles of ejusdem generis and noscitur a sociis, when read in
the context of the entire opinion, it is clear that the two clauses must be read
together – that is, the clause “or an intention to benefit the particular recipient”
does not stand alone, but modifies the previous clause. See, e.g., Gustafson v.
Alloyd Co., 513 U.S. 561, 575 (1995) (“a word is known by the company it keeps
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(the doctrine of noscitur a sociis) [which] we rely upon to avoid ascribing to one
word a meaning so broad that it is inconsistent with its accompanying words”).
The Government next focuses on the Supreme Court’s statement that the
“elements of fiduciary duty and exploitation of nonpublic information also exist
when an insider makes a gift of confidential information to a trading relative or
friend. The tip and trade resemble trading by the insider himself followed by a gift
of the profits to the recipient.” See 463 U.S. at 664. Here again, the Government
misconstrues the language by arguing that friendship is sufficient to prove a
personal benefit. Pet. for Reh’g at 13. In including this language, the Supreme
Court was explaining that a relative or friend relationship can be evidence of the
“elements of fiduciary duty and exploitation” and that an individual cannot do
indirectly – through a “straw” – what he or she cannot do directly. Id. at 664
(emphasis added). But the mere relationship, without more, is not a breach of any
duty.
The bottom line is that the Panel correctly held that Dirks and this Court’s
cases on tippee liability require that the tipper receive a personal benefit that is
concrete, objective and “of some consequence.”6 Newman, 773 F.3d at 452; see
also United States v. Jiau, 734 F.3d 147, 153 (2d Cir. 2013) (“enter[ing] into a
6. The Panel also correctly held that a tippee must know of the personal benefit received by the insider in exchange for the disclosure. Newman, 773 F.3d at 451.
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relationship of quid pro quo . . . could yield future pecuniary gain”), cert. denied,
135 S. Ct. 311 (2014).
CONCLUSION
Amicus Mark Cuban is not suggesting that the bar against archetypal insider
trading – trading by an insider (directly or indirectly) based on material nonpublic
information in breach of the insider’s fiduciary duty – should be discarded. But he
strongly believes that insider trading should be defined in a manner that allows
individuals to know with certainty whether a trade is legal or illegal before they
engage in the transaction. While this Court cannot require Congress to act, it can
follow the Supreme Court’s lead by reining in the Government’s attempts to
expand the reach of insider trading proscriptions. That is what the Panel already
did. The Government’s petition for rehearing or rehearing en banc should
therefore be denied.
Respectfully submitted,
/s/ Ralph C. Ferrara Ralph C. Ferrara Ann M. Ashton Rachel O. Wolkinson Scott J. Fishwick Proskauer Rose LLP 1001 Pennsylvania Avenue, NW Suite 600 South Washington, DC 20004 (202) 416-6800
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John E. Roberts Proskauer Rose LLP One International Place Boston, Massachusetts 02110 (617) 526-9600 Stephen A. Best Brown Rudnick, LLP 601 Thirteenth Street, NW Suite 600 Washington, DC 20005 (202) 536-1700
February 19, 2015 Attorneys for Amicus Curiae Mark Cuban
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